Burn rate

Burn rate is the rate at which a company consumes cash. There are two versions: gross burn rate and net burn rate.

Gross burn rate is the total cash spent per month on all operating expenses: salaries, rent, software, marketing, and everything else. It tells you how much it costs to run the business regardless of revenue.

Net burn rate subtracts cash revenue from gross burn. It represents the actual monthly cash deficit. If a company spends 500,000 pounds per month and earns 300,000 pounds, the net burn rate is 200,000 pounds per month.

For venture-backed startups, burn rate is an existential metric. It determines cash runway (how many months until the money runs out), which in turn determines when the company must raise more capital, cut costs, or reach profitability. Running out of cash is the number one cause of startup failure, and it is almost always preceded by a period of burn rate that was too high relative to the available capital.

Gross burn rate is simply total monthly operating expenses:

Gross Burn Rate = Total Monthly Cash Expenses

Net burn rate accounts for revenue:

Net Burn Rate = Monthly Cash Expenses - Monthly Cash Revenue

Cash runway then follows directly:

Cash Runway (months) = Cash Balance / Net Burn Rate

For example, if a company has 3 million pounds in the bank, spends 400,000 per month, and earns 150,000 per month:

A burn rate metric tree decomposes monthly cash consumption into its functional components, connecting the headline number to the spending decisions that individual teams and budget owners control.

The tree reveals that people costs typically represent 60-80% of gross burn for software companies. This means that burn rate is primarily a headcount question. Reducing burn almost always requires either slowing hiring, reducing team size, or growing revenue to offset the people costs. Non-people expenses like software subscriptions and marketing spend are important but are usually secondary levers.

The tree also helps leadership teams make more precise tradeoff decisions. Rather than mandating a blanket 20% cost reduction, you can identify which branches of the tree are delivering the lowest return and target reductions there while protecting high-ROI investments.

The standard guidance is to maintain at least 18 months of runway at the current burn rate. This provides enough time to achieve the milestones needed for the next funding round or to adjust course if needed. Companies with less than 12 months of runway should treat burn reduction as an urgent priority.

A useful efficiency metric is the burn multiple: net burn divided by net new ARR. A burn multiple below 1.5 is considered efficient (spending less than 1.50 pounds for every pound of new ARR). Above 2.0 is concerning, and above 3.0 suggests the company is burning cash faster than it is building recurring revenue.

1. 1

   Confusing accounting expenses with cash burn

   GAAP expenses include non-cash items like depreciation and stock-based compensation. Cash burn should reflect actual cash leaving the bank account, not accounting entries.

2. 2

   Not distinguishing gross from net burn

   A company with 500,000 gross burn and 100,000 net burn is in a fundamentally different position than one with 200,000 gross burn and 150,000 net burn. Both the absolute spend level and the revenue offset matter.

3. 3

   Cutting burn indiscriminately

   Reducing burn by cutting high-ROI marketing spend or key engineering talent may save cash in the short term but destroy long-term growth. Use the metric tree to cut low-return spend while protecting high-return investments.